Monday, January 18, 2010

SUMMARY:- News is not bad, earnings are good, but market responds negatively.- SP500 rallies 8 out of 10 sessions and the financial stations act as if it was down 8 out of 10 sessions.- Despite the chop on NASDAQ and being down two of three sessions, bigger picture the indices hold near support- Economic data in line and improving, but it is not that great an improvement.- With indices at next resistance market needs a bit of consolidation or a big catalyst to break them higher. Thus far earnings have not done the trick- Time to be patient and let the good stocks test and set up entry points.

I did not feel the market would make a breakout on Friday, and it definitely did not. It is not that the news was bad. CPI was a bit better on the headline than expected, and the core was right in line at the 0.1% gain. Industrial production was in line at 0.6. Capacity was actually ahead at 72 versus 7 1.8 expected, and the New York PMI came in at a solid 15.92. That beat the 12 expected, and was much better than the 2.55 originally reported in December. Even that was revised up to 4.5.

It was just the fact that the market, SP500 namely, was up eight out of nine days moving into this session. It is also expiration, and there will be position shuffling. To top it off, the market is almost at the heart of earnings season. There is a lot coming out. Even with INTC's earnings on Thursday night - where it beat on both the bottom and top line and said it will expand operations - the market was not very pleased with it. You would think that would be good for all of the semiconductors (particularly the chip equipment makers), but they were down as well. The market was not ready to break higher. It is notable that it could not move on such good news with INTC.

The market has been up eight out of nine days on the SP500. The NASDAQ was still holding its gains, but had become a bit choppy. That may be telling more of the story. SP500 with its dollar-related or overseas-related stocks is moving higher, while some of the NASDAQ got up ahead of itself. Looking at the SOX chart, the small caps - particularly semiconductors - were ready to come back.

The indices may look heavy and are definitely getting choppier with the semiconductors and NASDAQ, but we have to look at the bigger picture. Do not get too tied up in the day-to-day, up and down movements. After all, on Friday, all the journalism majors that tried to pass themselves off as financial news anchors were very glum about the action. The market has gone down two out of the last three days, regardless of the fact that it broke out in late December and rallied up through mid-January. That did not matter; it was what happened Friday. A bunch of long faces, and many questions from the analysts: Is this going to be the start of a selloff? Is this the end of the run? Well, it may be, but I seriously doubt it. The liquidity is still out there pumping things up. Markets will still correct and test no matter what the uptrend is, and maybe that is what we are due for right now. It certainly looks as if the SOX is making a correction near term. The question is whether it will be a leader or just typically more volatile than the rest of the indices as it always is.

When you look at the macro picture, you have to note that NASDAQ tapped at the 18 day EMA once more and it held, despite all the chop and its loss of over 1% on the session. The SP500 also tapped at the 18 day EMA and held. The SP600 held at the 18 day EMA on the low and bounced back. It was not a total selloff it was not the kind of gutting you would imagine if you'd just stepped in from being gone a month or two and listened to the journalism majors on the financial channels.

The indices did lose over 1% across the board. That is except for the Dow, but it lost 0.94% itself, so it was not far away. Nonetheless, they are holding their trends. It was a tough day, but it was also the end of expiration. The market has rallied almost straight up for two weeks on SP500, and there is a long weekend ahead. There will be some profit taking after such a run. There will be positions shuffled thanks to expiration, and some people will want to take cash off the table with earnings coming up. I think we saw a bit of all of that on Friday.

OTHER MARKETS

The dollar was up on the day. It continues in a flag pattern it has formed after it reversed its trend and rallied off the late-November low. It has sold back all the way to the 50 day EMA. There is a bit of support there, and it is trying to bounce again but has not made it yet. It got some traction on Friday and managed to close higher (1.4378 Euros versus 1.4499 Thursday), and that colored the other markets.

Oil traded lower again. It broke through the 18 day EMA it was trying to hold, and now it is down at the 50 day EMA in the meat of the consolidation from mid-October through November. Oil bounced up, hit the top of its range, and it is selling back. It did not help on Friday that the IEA lowered its 2010 expected oil demand. The IEA apparently does not think the world economies will recover as much as the other pundits out there do. That may have had an effect on oil, but oil is in a technical move right now, bouncing down from its prior peak. If it holds and can bounce up, that will be of real interest. It will then likely break through and out of the top of its range. If oil breaks out over $85.00 and rallies again, that would be a game-changer for many of the forecasts for 2010. That would be serious for the world economies.

With the dollar up, gold struggled again. It was up two days, Wednesday and Thursday, and it gave it back on Friday. We are still in the move higher. There was a higher low, and then it has come back and is testing right now. It is still making a higher low overall, so the pattern is still positive. It is much more sluggish than it has been in the past. It had a big run and is digesting the gains, but it is edging out something of a cup with handle. We will see if it can make the breakout and run up to the prior peak.

Bonds have been rallying, and interest rates are going down. If the economy is getting better as many people think it will, why are bonds rallying again? They had good demand on the auctions this week, but then again, that means bonds are rallying and people are concerned about being in stocks. That may be the case. Economic data was a bit worrisome, and it all started with AA. That got things off on the wrong foot with earnings season, and the market has been gun shy ever since. Bonds have been rallying and interest rates have been falling. The 10 year closed lower (3.68% versus 3.73% the prior session.) Even the short end at the 2 year was down (0.87% versus 0.92% Thursday). It was at 1% just over a week ago. Bonds are definitely rallying, and that often means discontent with respect to the economic future. I do not want to worry too much about that right now. I would just like to see bonds stabilize and avoid any sudden spikes in the 10 year that might indicate there is inflation. It is somewhat doing that with this move. As investors moved out of stocks a bit, they moved toward Treasuries, and that is normal.

The breadth is getting more volatile (as it was before the past few weeks). There has been +1.4:1 or -1.4:1; that seems to be the comfort zone for the indices. The breadth is now starting to expand on days that are decidedly stronger or decidedly weaker. On Friday breadth was - 2.75:1 on NASDAQ and -2.3:1 on NYSE. The last time there was breadth that strong was on Wednesday when the market was up. There is still capability to have strong breadth both ways, but it is something that has not happened in awhile. Does this mean volatility is moving back into the market? We are seeing some day-to-day. Looking at the NASDAQ chart, it has been bouncing around in this range, and it is not a tight range. It is very volatile. There are big moves up, gaps down, and then moves back up and down. There is volatility returning to the market, and that means breadth expands.

Volume surged. It was well above average on NASDAQ the strongest of the year. The NYSE volume was up as well. It moved back above average and had the strongest volume of the year. It is only the third time it has been above average in 2010, but that does not mean anything because it is expiration Friday. I will not attribute anything to this volume. Volume has been elevated on NASDAQ the entire year while it has not been on the NYSE. NASDAQ is considered more of a growth area with its technology, medical stocks, and smaller stocks (it is not just limited to the SP600). That makes the higher volume interesting because that indicates that investors are interested in growth stocks to start the new year. The index is still trending higher despite being choppy this year. You have to view that as a positive overall, but also take it with a grain of salt because there is a lot of volatility day-to-day coupled with a lot of volume on NASDAQ. That is typically not a great scenario when there has been a long run. Keep that in mind as earnings unfold and we see how stocks react. The earnings reaction to INTC was not great on Friday. It blew it out on the top and bottom line and had nothing but good things to say. Margins were at a record, yet it was down on the session; indeed, most of the chips and techs were down. With all of this chop and volatility coupled with above average volume on every session but one in 2010, that warrants being careful as we move forward in earnings season.

CHARTS

On Thursday, I talked about how the main indices have bumped into a resistance level, and that is still in play at this point. Selling back from that level is obviously a sign of weakness of a certain degree. NASDAQ is at its September 2008 peak that jumped up there in the middle of the month. The SP500 is at the mid-month low from September 2008. It has not quite made that level, but it is bouncing back. There is choppier trade on NASDAQ, and there is more volatile and choppy trade on SP500. There is some chop coming back into the market as they hit resistance. The sellers are there and the buyers are there, and they are fighting it out. Overall, however, the large indices held their 18 day EMAs. They have also held this near-term trendline. This is not a bad one because there are three points on it on NASDAQ. This is a solid trendline at 2255.

SP500 still has a trendline it is holding, and it tapped it on Friday. We have three points on this as well; if it holds, there will be a fourth point, and that would make a solid trendline. It is trying to hold this level, and that would be a good point for it to do so and continue on this breakout of rally and testing. It would be due to rally now, but it has to have a catalyst. SOX is already in correction mode. Will it be followed by NASDAQ and the other indices, or is it just being its usual volatile self and coming down to test? There is a potential for an ABCD pattern, but it is ragged. You want them to be clean and neat to be their most powerful. The question is whether it is leading the market into a deeper correction or just getting it out of its system first.

LEADERSHIP

Most of leadership is in modest pullbacks. The industrials, commodities, and materials are all in pullbacks. This all started on Tuesday when China said that it was going to raise the reserve limits for its banks. That typically leads to this kind of selling. It does not last that long, but it gets investors nervous about their positions in industrials, energy, and metals and they succumb to profit taking.

CMI was back. There was a big breakout, and then Tuesday knocked it back. It is still testing, and it is in a great pullback. BUCY gapped down on Tuesday and is now testing. We might get a nice play out of it in a few days. TEX was not affected. It had a nice break higher and a nice test. It could be ready for a new buy. CAT is struggling. It had a great pullback but a bad Friday, and it gapped down and then sold off. It is at the bottom of its range marked by the November and December peaks. It can find support there, continue higher, and salvage itself. Most of them are in pullbacks, but that is after good runs as well.

Oil was down, but energy stocks held their ground. SLB is moving laterally at its peak. APA is also moving laterally and consolidating its gains. BTU had a nice pullback, and we might get a buy out of that. CVX is not bad either. VLO is showing great volume as it breaks higher. It is still a sloppy pattern, so it is hard to get into that one. There are some good stocks holding their own even though oil is falling.

The chips are struggling. INTC had great earnings, it was hammered, but of course, it rose from $20 to all of $21.50 over the prior four weeks and got knocked back. It is not like the old days, back in the 80's and 90's, is it? It was knocked back 3% on high volume. They were not impressed with the earnings, but it did not destroy the pattern. AAPL took a hit as well. It has been trying to set up nicely over the October-November peaks, and it came back. It is trying to hold the lower part of the range right now. QCOM has been having a good run, and it just took it in stride. It is in an easy pullback and is still in good shape, but it will be hard to make money on QCOM. It has to move a long way, and it is not that big of a mover anymore. It went up for three weeks straight, and it was only a 10% move. QLGC has a nice pullback under way. Low volume, gapped higher. It is filling the gap. That is a very interesting play setting up.

The financials are having trouble right now. JPM came out with earnings and it just plain missed. It was having problems on its revenues with losses in mortgages and commercial loans. It had to increase its loan-loss reserve, and it just went down. The good thing about JPM is that it did not go down that much --- only 2.25%. It is still in consolidation, and we might get an ABCD pattern out of it and watch it head upside. Do not ever give up on them just because they do not do something you want them to do on one day. GS is having its issues, but an ABCD pattern had set up. It is at support at 165. Are we looking to bail? If it does not perform, yes. However, with an ABCD pattern, it could get back up to the November peak at 180 fairly easily, and that would make a great play to the upside. Going from 165 up to 180 --- playing some options, I would take that any day. MS is very similar. It sold off, but it is not bad. WFC sold back, but it is also holding in its recent range and could set up an ABCD pattern if it steps down a bit lower.

There are stocks that are pulling back, but they are not destroying themselves, and that is always a positive. You like to see stocks pull back, give you opportunities to move in, and then actually bounce. Then you can enjoy the ride back up. I really like it when the pundits on the financial stations are so negative. They are going to get a chance to buy these stocks at a better price and they are just so glum about it. I like when they get negative when there is a two-day pullback after an eight-day run. I will take that any day.

This is a reading of the number of bullish investment advisors versus bearish advisors. The reason you look at this is that it gives you an idea of how bullish investors are. If they are too bullish then everyone is in the market and it is heading for a top: if everyone wants to be in the market then all the money is in and there is no more new cash to drive it higher. On the other side of the spectrum if there are a lot of bears then there is a lot of cash on the sideline, and as the market rallies it drags that cash in as the bears give in. That cash provides the market the fuel to move higher. If bears are low it is the same as a lot of bulls: everyone is in and the market doesn't have the cash to drive it higher.

Bulls: 48.3%. Once again bulls have peaked out near the 50% level. Bulls have bumped at 50ish since late August 2009, falling to 45ish and then rebounding. Thus for now this is more of the same as bulls get a bit pessimistic as the indices rise again and VIX falls. Hit 52.2% three weeks back, the highest level on this run. Still well over the 35% level that is the threshold for what is considered a bullish climate. It does not mean things are necessarily bearish; that takes a reading in the 60% range. Hit a high of 47.7% mid-June on the run from the March lows. Again, to be seriously bearish it needs to get up to the 60% to 65% level. Dramatic rise from 21.3% in November 2008, the bottom on this leg. This last leg down showed us the largest single week drop we have ever seen, falling from 33.7% to 25.3%. Hit 40.7% on the high during the rally off the July 2008 lows. 30.9% was the March low. In March the indicator did its job with the dive below 35% and the crossover with the bears. A move into the lower 40's is a decline of significance. A move to 35% is a bullish indicator.

Bears: 16.9%. Virtually in a flat line the past 6 weeks, down from 28% in mid-November. No sign of real worry based on this reading. This is the lowest level of the entire rally and is at a bearish level. Peaked near 28% on this round, falling short of the 35.6% hit in July 2009. For reference, cracking above the 35% threshold considered bullish. Hit a high on this run at 47.2%. For reference, bearishness hit a 5 year high at 54.4% the last week of October 2008. The move over 50 took bearish sentiment to its highest level since 1995. Extreme negative sentiment. Prior levels for comparison: Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). That was a huge turn, unlike any seen in recent history.

NASDAQ

Stats: -28.75 points (-1.24%) to close at 2287.99Volume: 2.556B (+16.49%)

Up Volume: 569.157M (-743.322M) Down Volume: 2.07B (+1.123B)

A/D and Hi/Lo: Decliners led 2.75 to 1Previous Session: Advancers led 1.42 to 1

Monday is a holiday. Maybe things will finally get back to "normal" after that. There will not be any expiration, after all it will just be earnings season kicking off in full swing. The market is bumping up against that resistance. The September low at about 1152 is the next resistance. It is up there and having a bit of trouble. The same thing on NASDAQ: it is having problems at its resistance from that September peak as well. The small caps are having issues from way back in 2008 when there were 1,2, 3 lows. It is at that point now and bumping its head. The market needs a catalyst to get it to move through this resistance. It is acting tired. NASDAQ is volatile and choppy, moving laterally. INTC gave a good earnings report and went down. We will have to see what the other earnings are and how the companies are treated after they report. If it is similar treatment, you know that the market is tired and will need consolidation or a big catalyst to send it higher.

Our game plan is to look for more testing. There will be more chop and testing by stocks. Some of these are in excellent shape to move back up, and they may be early leaders. It may take a couple more days of moving laterally at support before the market is ready to let them go, but we will be ready when they do. Be patient and watch the test. We want to look for good stocks in good pullbacks that we can take advantage of. We will get good positions just as other people are wringing their hands worrying about them. Do not get overly excited when you see a stock dip and bounce. Let us make sure we can get a close to the upside that looks strong and that the rest of the market is gelling as well.

Do not feel bad about closing some positions now. We are in earnings season, and there has been a good run higher. We have taken a lot of gain and continued to take gain on Friday, but do not feel bad if you want to close a position. Do not feel bad about closing it, raising some cash, and being patient and picking new opportunities. If you can get out without too bad of a loss and you see others, such as CMI, setting up well for a break higher, then close one out and put it to work where you think it will make you some money. If CMI makes a break higher off this pullback, maybe you will go in, make some green, and feel good about the recovery after the first pullback of the new year.

There is nothing showing there will be a major correction. There is a lot more chop, but we have to mind our current positions. We have taken a lot of gain already. Remember that earnings are out there, and do not feel like you have to buy stocks just because earnings are coming. Indeed, it is a good time to wait and let stocks gap up or down, and then set up for much higher percentage plays. We are taking positions out that have earnings in February so we do not have to make squeeze plays on them. That is also why we are foregoing some if they do not show us exactly what we want to see. We can be patient, and we have the luxury to do that after a good gain after a good rally. We are going to pick our shots when they are available, then move in and feel good about it. We will get good entry points. If they turn against us, we will just close them out and will not have lost much of anything. If we hit them right, we let them run and we make great gains. Have a wonderful weekend.

Support and Resistance

NASDAQ: Closed at 2287.99Resistance:2292 is a low from January 20082319 from the September 2008 peak2326.28 is the January high2324-2370 is a range of resistance from early 20082382-2395 from 20082412-2415 represents a series of peaks and lows in 2007, 20082453 is the August 2008 peak

Support:The 18 day EMA at 22822275 - 2278 from the February 2008 and April 2008 lows2245 from July 2008 through 2260 from late 2005. The 50 day EMA at 22242218 is the August 2005 peak2210 (from September 2008) to 2212 (the July 2009 closing low)2205 is the November 2009 peak2191 is the October 2009 peak2177 is a low from March 20082169 is the March 2008 closing low (double bottom)2168 is the September 2009, intraday peak2167 from the July 2008 intraday low2155 is the March 2008 intraday low2143 is the October 2009 range low2099 is the mid-September 2008 closing low2070 is the September 2008 intraday low2060 is the August peak2048 is the early October 2009 closing low2016 is the early August peak1984 from late SeptemberThe 200 day SM A at 19801962 is the bottom of the August 2009 range.1947 is the October gap down point

S&P 500: Closed at 1136.03Resistance:1150 is the January 2010 peak1156 is the Sept 2008 low1185 from late September 20081200 from the July 2008 low

Support:1133 from a September 2008 intraday lowThe 18 day EMA at 11321119 is the early December intraday high1114 is the November 2009 peakThe 50 day EMA at 11101106 is the September 2008 low1101 is the October high1080 is the September 2009 peak1078 is the October range low1070 is the late September 2009 peak1044 is the October 2008 intraday highThe August peak at 1040The early October 2009 closing low at 1025The early August intraday peak at 1018The November 2008 peak at 1006 closing 1007.53 intradayThe 200 day SMA at 1001992 is the August 2009 consolidation low

Dow: Closed at 10,609.65Resistance:10,963 is the July 2008 low

Support:10,609 from the Mid-September 2008 interim lowThe 18 day EMA at 10,57110,496 is the November 2009 highThe 50 day EMA at 10,38210,365 is the late September 2008 low10,120 is the October 2009 peak9918 is the September 2008 peak9855 is the early September peak in its lateral range9835 is the late September 2009 peak9654 is the November 2008 high9625 is the October 2008 closing high9620 is the August 2009 peak9430 is the early October low9387 is the mid-October peakThe 200 day SMA at 9322

Economic Calendar

These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.